The minimum wage mirage

November 15, 2006

Raising the minimum wage is all the rage right now. Last week, voters in six states endorsed measures to lift the floor, bringing to 29 the number of states that mandate more than the federal level of $5.15. One of the first items of business for Democrats once they take over Congress will be to raise the federal minimum wage to $7.25 over two years. President Bush says this is an issue on which he and the opposition may find common ground. Meanwhile, Gov. Rod Blagojevich wants to boost the current Illinois minimum of $6.50 an hour to $7.50, with automatic cost-of-living increases. Mayor Richard Daley supports the idea.

It's not surprising to find most Americans favoring the idea of using someone else's money--that of employers--to finance a raise for people who can use it. Polls dating to 1937 indicate that it has always been a popular idea. But that's partly because its full effects are generally not understood.

The benefits are obvious: more money in the paychecks of workers at the bottom of the wage scale. The likely side effects are less apparent but equally significant--fewer jobs, especially among unskilled and young workers. Some economists insist that fear is groundless. But the great majority of the profession continues to accept the elementary axiom that when you raise the price of something, you reduce the demand for it. Even if employers don't lay off people immediately, they will certainly start looking for ways to reduce staff.

Companies dependent on entry-level workers, such as the restaurant business, will have a particular incentive to do exactly that. A story by Tribune reporter Barbara Rose noted that after the last increase in the state floor, Home Run Inn in Chicago got new ovens that need fewer workers to operate. When the owners planned a new restaurant in Bolingbrook, they designed it so they could manage with 12 workers on a busy night instead of 14. The jobs that are never created thanks to the minimum wage, alas, are never noticed by the public at large.

Unfortunately, the workers who pay the price are the ones with the fewest options--those with few skills or job experience, who need to get on the employment ladder before they can start climbing. Research by one minimum wage expert, economist David Neumark of the University of California, Irvine indicates that the damage is long-lasting. "Even as individuals reach their late 20s, they work less and earn less the longer they were exposed to a higher minimum wage, especially as a teenager," he found.

Nor is a higher minimum wage effective at the obvious goal of combating poverty. Some families do pull themselves above the poverty line with their raises, but Neumark has found that even more fall into poverty due to the job-destroying effects of the change.

A better way to help poor people is to increase the Earned Income Tax Credit, which supplements the wages of low-income working families. Its genius is that it increases the compensation of low-wage workers without inducing companies to cut back hiring. And it spreads the costs of this generosity across all taxpayers, instead of singling out employers.

This approach lacks the bumper-sticker appeal of legislating pay raises for some workers. But it also lacks the serious drawbacks that still make the minimum wage a losing deal.

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WHAT DO YOU THINK?

- Should government be able to tell employers how much to pay their workers? Why or why not? E-mail us by 2 p.m. Wednesday at ctc-response@tribune.com with "wage" in the subject line. Include your name, hometown and contact information. Responses will be published online and in Thursday's Voice of the People.